Once again, the bearish contingent held sway over the proceedings on Friday and as a result the Dow underwent another triple-digit move to the downside, which now means that of the past 14 trading days, no less than 10 of them have seen this type of net change and the scorecard for those 10 days now reads 4 positive and 6 negative.

Of course this shift toward the negative on these large point move days is one of the factors behind the market’s having declined for three out of the past four weeks ever since Chairman Bernanke raised the possibility of some tapering of the current $85 billion a month Fed stimulus programs, and the timing of this eventuality is what has investors all bent out of shape at the present time.

The Dow opened with a fast loss of 30, then came up to an even more rapid gain of 29 at its 10am high, went negative at 10:30am, from which level it steadily deteriorated to its worst point of the session with a loss of 132 at 2pm. From here, it actually had the nerve to try to make a comeback and was lower by “only” 65 at 3:20pm, from which it came back down once again to finally end with a closing 106 point decline, thus putting it into the category mentioned above. This type of market action is also consistent with my long-standing belief that on a summer Friday when the market is in this weak a position, it is extremely rare for it to make any sort of substantial move back to the upside.

Breadth numbers were actually negative by only a 14/16 ratio, which is a far cry from some of the really awful readings that we saw last week on the two other 100-plus point down days. The VIX rose by .74 up to 17.15 as there is substantial resistance in the mid-18 area, and every time that the VIX seems to reach this level, there is a rally by stocks back upward.

Treasury yields actually declined a bit with the 30-year down to 3.30% while the 10-year was at 2.13%, and both of these are around 8-9 basis points below their highest levels that were recently reached as the bond market starts to price in the certainty of some kind of pulling back of the current stimulus programs currently in force.

The dollar weakened once again and it was this latest obsession with the so-called Japanese yen “carry trade” that messed things up here, and this is when investors supposedly borrow in yen to buy stocks, so when the yen rises against the dollar they have to buy it back and then sell out their stocks and I refuse to believe that this particular process accounts for market movements on a daily basis, because there have to be tons of investors who buy and sell stocks for more traditional reasons, but then this is a wonderful opportunity for market experts to “explain” why equities here are moving up and down, just like a few weeks ago when they attributed a late decline to the re-balancing of the MSCI, which of course no one knew what it involved, but this kind of talk illustrates that the person who utters it is a real market authority, even though they just take this news off of some sort of financial media story about the market in the first place.

For what it is worth, the yen did decline down to 94.31 so perhaps there are some people who do this trade which is obviously beyond the capabilities of most investors to enter into. Oh, and did I forget to mentioned that the Russell 2000 Index of small stock was going to be re-balanced after Friday’s close as well, so market experts had another negative story to throw into the mix.

One market that has been rising lately no matter what any other market does is crude oil and those participants who want higher prices now have the perfect excuse, namely “trouble in the Middle East”, and how many times have we heard that one before, as this Syrian disaster has been going on for more than two years now, but then one can throw the anti-government riots in Turkey as another reason for the rise in prices, which resulted in crude getting up to $97.78 a barrel despite the large supplies on hand in this country but never mind, as this is what the oil companies want, namely to extract as much as they can from consumers during the busiest driving season of the year.

All of this Fed uncertainty has resulted in the fact that for the past three weeks, the Dow has been showing an extreme daily movement of 191 points a day, which is the largest such volatility since December 2001. And this compares to the average of 110 points a day before the Fed got into the act last month.

So what happened to cause Friday’s selloff, and it was pointed out that the I.M.F. lowered its growth projections for the U.S. down to 2.7% from 3%, and for this year it is 1.9%. They also urged the Fed to “carefully manage their exit strategy from the current stimulus programs”. In addition, sentiment was hurt by the lower than forecast preliminary June U. of Michigan Consumer Sentiment Survey, down from a six-year high the month before, in addition to the lower May industrial production report as well, which came in unchanged when a 0.2% gain was forecast.

So after all of the negative handwringing following the third down week out of the past four for our equity markets, the various stock index futures started out higher last night and kept pushing to the upside as the evening and early morning wore on, with the result that at least for a day all of the negativity is being forgotten. The Dow opened with a gain of 40 and then continued to move ahead and reached its best level of the day so far with a 191 point advance at 11:10am, from which it has cooled off a bit to be ahead by163 as this is being written.

Breadth numbers are at a strong 21/8 positive ratio and once again the VIX is hardly declining at all relative to this level of equity gain as it is lower by only .32 to 16.83, which is sort of ridiculous but then again investors are looking for obvious fireworks in Wednesday when the F.O.M.C. statement is released and Bernanke holds his press conference, which usually results in the market moving lower, so this is the reason for some VIX buying despite the strength that equities are showing.

Bond yields are up a bit as investors position themselves for the big Fed goings-on with the 30 year up to 3.32% while the 10-year is at 2.14%. and surprise, surprise – the Japanese yen had the nerve to decline today, as it is up to 94.92 against the dollar, and this was after it had reached its strongest level against the greenback in two months. This of course is the bizarre pattern that we are in, because then Japanese stocks made a nice comeback as well after the 20% decline from the highs that they had fallen, and then this allows stocks here to move higher as well.

What happened to now allow for the 11th triple-digit Dow movement out of the past 15 sessions, and the answer is that in addition to the better Japanese news, one expert had the nerve to say that Fed stimulus tapering is already “priced into the market”, as what is the explanation going to be on the next day that things get whacked around to the downside because of this same concern about Fed withdrawal?

On the other hand, there is a historical statistic that says during the past four times that the Fed raises rates, the market has advanced by 16% over the following two years, so we shall see how this plays out and let us hope that history repeats itself.

Of course one market that goes higher whether stocks go up or down is crude oil, up now for the fourth straight session and near a nine-month high around $98 a barrel on the better economic reports released today, as for instance the June NY State Empire Manufacturing Survey reached its highest level since March and the June NAHB Housing Market Sentiment Index rose to its best level in seven years, but then again crude oil went up despite Friday’s weaker reports because it used the old trouble in the Middle East factor as mentioned above, to seek higher levels. As it now flirts with the $98 a barrel level, how is this supposed to help stocks continue to move higher?

The Euro is a bit lower but also hanging in there at 1.33 and gold is down as it struggles to stay above the $1,350 an ounce support level that it has not breached in the past two months.

Economic reports this week will include – Tuesday: May C.P.I., May housing starts and building permits, and then the huge one, namely the F.O.M.C. statement and Bernanke press conference; Thursday – weekly jobless claims,
June Philadelphia Fed Manufacturing Survey, May existing home sales and May L.E.I.

First quarter earnings for 2013 rose by 5% and the projection at the present time for the second quarter is for earnings to be just around flat, and then we will ostensibly see earnings advances of 4.6% for the third-quarter and 5.7% in the fourth-quarter.

The S&P trades at 15 times the projected 2013 earnings of $111. Earnings were $85 in 2010, $92 in 2011 and $102 in 2012. The estimate for 2013 is $111, a gain of 9%. The average P/E multiple for the S&P going back to 1954 has been 16.4 and it has been 14.4 for the last 10 year’s average.

After four consecutive quarters of negative G.D.P. growth, we have had 15 consecutive quarters of positive growth, starting with the third-quarter of 2009, every quarter in 2010, every quarter in 2011, and every quarter in 2012. G.D.P. rose by 2.2% in 2012, and is projected to increase by 2% in 2013, according to various surveys, with 2.5% in the first-quarter and then in the low 1’s for the second and third-quarters before a fourth-quarter acceleration to over 4%.

Donald M. Selkin

Don Selkin is the Chief Market Strategist at National Securities Corporation, member FINRA/SIPC, (NSC) and provides the Fair Value analysis for CNBC each morning. The commentary provided in this Market Letter is intended to provide our customers with timely market analysis and should not be considered a research report. This Market Letter may contain, and is limited to: Discussions of broad based indices; Commentaries on economic, political or market conditions; Technical analyses concerning the demand and supply for a sector, index or industry based in trading volume and price; Statistical summaries of multiple companies’ financial data, including listings of current ratings; and, Recommendations regarding increasing or decreasing holdings in particular industries or securities. This Market Letter does not make a financial or investment recommendation or otherwise promotes a product or service of the firm. This Market Letter contains only news, facts, and commentary on information previously reported from a news source believed to be accurate and reliable by the author. These news sources include the following: {Bloomberg Financial, Reuters, Associated Press}.